In April markets regained some of their losses from March with the ASX 200 rising by 8.8% and the MSCI World Au. rising 3.7%.

The past week saw more bad economic data globally with sharp contractions in US and Eurozone GDP in the March quarter and this will be a lot worse in the current quarter as the full brunt of the shutdowns impact June quarter economic data. We anticipate June GDP to contract by around 10% in the US, Europe, Japan and Australia.

 

This will clearly weigh on company profits which will take a 30% or so hit in the near term. The March quarter earnings reporting season in the US which is now more than half way through is seeing only 49% of companies reporting profit growth on a year ago and profits are running down around 14% from a year ago (helped a bit by better than expected results from big tech companies) and consensus expectations for second quarter earnings are down 36% from the 2019 high. The hit to profits was highlighted in Australia with banks announcing a hit to earnings, capital raisings and cuts to dividends. 

The bottom line remains that after the strong run up in global and Australian shares since the low around 23rd March they are vulnerable to a pullback on the back of the very poor economic and profit data we will see over the next few months. Increased tensions between the US and China may add to this and a retest of the March low still can’t be ruled out. But providing shutdowns ease in the months ahead resulting in April or May proving to be the low point in economic data then given the massive policy stimulus shares should be able to resume their rising trend and so we retain a positive 12-month outlook.
 
Markets will likely remain focussed on continuing evidence that the number of new Covid-19 cases is slowing and on progress towards an easing in lockdowns. Economic releases will continue to show the increasing impact of coronavirus shutdowns. Friday looks likely to be a key day on this front in Australia, with the Government likely to announce a progressive easing in the lockdown.
 
In the US, the focus will be on jobs data for April due Friday which based on jobless claims are likely to show a 22 million plunge in payroll employment and a massive rise in unemployment to 16% (from just 4.4% in March). In other data expect to see a deterioration in the US trade deficit for March and a sharp fall in the non-manufacturing conditions ISM index for April (both due Tuesday). 
 
In Australia, the RBA on Tuesday is likely to again reaffirm the significant monetary easing it announced in March. The cash rate is at the RBA’s long stated lower bound and there is no value in taking it negative, so it won’t be cut. And in the meantime, we are yet to see the full extent of the hit to the economy from the coronavirus related shutdowns and it will take several years to fully recover so a rate hike is years away. We expect the cash rate to be stuck at 0.25% for at least the next three years. Cash & bank deposits are likely to provide very poor returns, given the ultra-low cash rate.
 
The Australian housing market is weakening in response to coronavirus. Social distancing is driving a collapse in sales volumes, and a sharp rise in unemployment, a stop to immigration through the shutdown and rent holidays pose a major threat to property prices. Prices are expected to fall between 5% to 20%, but government support measures including wage subsidies along with bank mortgage payment deferrals along with a plunge in listings will help limit falls at least for the next six months.
 
Source: ABS, AMP Capital.
 
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